Pass UPI costs to RBI, banks, not consumers

Last Tuesday, RBI supported NCPI's introduction of MDR of 0.4% on person-to-merchant (P2M) UPI transactions above ₹2,000 that will kick in from October 15. Much opinion has flowed since, many arguing that fiscal sense dictates that the fintech expense be charged.What it, however, chooses to ignore is the larger fiscal and financial discipline embodied in encouraging a majority price-sensitive society to keep moving towards digital payments and a less-cash society. Such an argument doesn't account for the huge savings made by RBI and banks in reducing printing of currency, and logistics of transfer and maintenance of cash.Also Read: UPI's free lunch is over: Why the 0.4% MDR charge is fair, needed and overdueThe end consumer is price-sensitive. After the latest MDR notice reached vendors, many removed the QR code display from their shops fearing harassment by tax authorities. Many petrol pumps have reportedly already started to insist on cash-only payment. Many are even going back to debit/credit cards, not to mention cash withdrawals from ATMs. The fig leaf of no charges in UPI below ₹2,000 is too small an amount, and will lead to 'splitting' of payments.To keep digital payments 'incentivised', the consensus should be that no fintech cost be loaded to end consumers, but MDR expenses be footed from bank savings. Charging the end user, in fact, would eventually bring in fiscal discipline by improving credit scores.Also Read: Credit where credit's due: India's tokenised bonds must now open the door to global capitalIn 2012, government-to-person (G2P) welfare schemes accelerated after linking the lowest economic cohort of the population to financial institutions, and then to digital transfer via DBTs. That triggered a policy to digitise post offices and cooperative banks that constituted 3/4th of financial institutions. There was a slow linear climb of other modes like RTGS and NEFT operation during bank timing windows.RBI's foundation was set with RTGS and NEFT for electronic clearings. Introduction of UPI in 2016, and deepening of digital payment efforts in 2019, ensured more people shift to a mobile-based payment system, and move towards smartphones even in rural and semi-rural India. 84% of digital payments have been high-frequency micro-payments through UPI with zero cost to end users. This has made for 9% of value, with maximum ticket size being less than ₹2,000. Other modes where there is cost, the tendency has been to shift to cash.Cost to digital payment prior to MDR made zero in January 2020 was paid by merchants to banks and service providers. P2P of UPI being free incentivised and enabled even small-ticket size to move to digital payments. The cost was borne by GoI through budgetary provisions.Sure, budgetary support can't be in perpetuity. But the answer doesn't lie in charging end users and triggering a shift to cash. It lies in tapping the huge savings made by RBI and financial institutions like banks by the printing of less currency, logistics and security provided for the cash with them.0.3-0.5% MDR on transactions should be charged for transactions above ₹2,000, and an 1.1% interchange fee to prepaid wallets. The answer doesn't lie in just accounting for expenses and charging the end user, but to feed this charge elsewhere.RBI printing expenditure fell to ₹4,875.2 cr in FY26 from ₹6,372.8 cr in FY25, a decrease of 23.5% in just one year due to digital payments' exponential growth. The absolute value of currency in circulation has tripled from ₹15 lakh cr in 2016 to about ₹43 lakh cr in 2026, incentivised by taxation policies and non-resorting to digital payments. The focus is to curb this tendency and encourage digital payments.Institutions are focusing more on financial inclusion, encouraging account-to-account and digital payments, thereby reducing requirement of cash considerably. This will further come down by wholesale CBDT usage. So, if India is serious about curbing the cash float that escapes tax net, and reducing the parallel economy, there is a strong need to reconsider the latest move on the MDR front and not charge end users the charges for digital payment.All policies and steps should incentivise digital payments with the fintech expense bill being supported by savings by RBI and banks in terms of non-printing of currencies, providing security and logistics. These will trigger the continued spread of digital payment and, at the same time, ensure that fintech costs are met.The writer is former secretary, GoI

from Economic Times https://ift.tt/McYWsUu